Market Perspective - Winter 2026

Guide to the markets

Sifting through financial information online is becoming quite onerous with so many opinions out there, so we've consolidated what we believe to be informative and insightful into one Market Commentary.

The U.S. economy (the largest ecnomy in the world, and our largest trading partner) enters 2026 on a mixed footing—supported by resilient consumer spending and AI-related capital investment, yet constrained by policy-driven headwinds such as tariffs, reduced immigration, and fiscal tightening. Growth should temporarily accelerate early in the year as income tax refunds boost disposable income, before moderating in the back half as stimulus effects fade. On balance, 2026 GDP growth near 2% reflects a cyclical rebound within a structurally slowing trend—a rhythm consistent with late-cycle conditions marked by policy frictions and productivity tailwinds.

Labor markets are cooling but remain tighter than typical for this stage of the cycle due to the collapse in net immigration. Slower population growth limits the available workforce, cushioning the unemployment rate even as job creation softens. This demographic constraint, while supporting near-term labor stability, also carries longer-term implications for growth capacity and fiscal sustainability. Wage pressures have eased but are unlikely to fall dramatically given ongoing labor scarcity in skilled sectors, helping stabilize income trends but reinforcing structural inflation inertia around the 2–3% range.

Inflation dynamics should remain uneven through 2026—rising temporarily as tariff costs and refund-driven consumption pass through, then easing back toward the Federal Reserve’s 2% target as those impulses fade. Against this backdrop, the Fed appears poised to continue gradual rate cuts, potentially reducing the policy rate toward the long-run neutral level near 3%. If growth softens further and fiscal stimulus remains constrained post–midterms, monetary policy may again become the primary stabilizer, with limited room to maneuver before approaching the lower bound. Meanwhile, a narrowing interest rate differential and sustained trade deficits suggest continued downward pressure on the dollar.

From an investment standpoint, 2026 favors balance over boldness. Earnings growth should remain solid—driven by productivity gains, subdued wages, and supportive tax conditions—though valuations in mega-cap U.S. equities appear stretched. International and alternative assets offer relative value and diversification, particularly as global currencies and income streams regain appeal amid dollar weakness. For investors, the prudent approach may be one of rebalancing—shifting from concentrated U.S. exposure toward a more globally diversified mix that captures steady returns from bonds, international equities, and select private-market opportunities as the cycle matures.

From JP Morgan’s Dr. David Kelly, Chief Strategist at J.P. Morgan Asset Management:

This market commentary is intended to give you a brief update on our views on the economic and market outlook.

The economy should speed up and then slow down in ‘26, averaging 2% growth for the year.

The collective impact of tariffs, the federal government shutdown and declining net immigration slowed the economy in late 2025. However, demand was supported by strong spending on AI infrastructure and solid consumer spending by upper income households following a third year of huge stock market gains. This support should continue into 2026. While we believe fourth quarter GDP growth was weak, we expect growth to bounce to roughly a 3% annual pace in the first half of 2026 due to surging income tax refunds, before fading later in the year in the absence of further fiscal stimulus. Overall, we expect economic growth to come in at close to 2.0% for 2026 – up slightly from 2025.

Lower immigration should limit the rise in unemployment despite slow job gains.

Slower GDP growth, diminished labor supply and significant federal government job cuts resulted in much slower employment growth over the course of 2025, with average monthly payroll gains falling to just 17,000 between May and November. We expect job growth to accelerate in early 2026, to between 50,000 and 100,000 jobs per month as consumer spending surges, and then fade to below 50,000 per month as the economy slows later in the year.

However, the impact of this slow job growth on the unemployment rate should be suppressed by lower immigration.

Illegal immigration has fallen almost to zero and deportations have increased. Data through May 2025 also suggested a decline in new immigrant visas issued. Data on both deportations and legal immigration are very spotty but overall we believe that net immigration has fallen to a pace of less than 250,000 per year, down from an average of over 1,000,000 per year in the two decades before the pandemic. This implies a flat or declining working-age population, holding the unemployment rate at roughly 4.5% in early 2026 and allowing it to edge down towards 4% later in the year.

Wage growth has softened but should stabilize as a lack of qualified workers counteracts recession worries in wage negotiations.

Inflation should rise in early 2026 due to income tax refunds and a delayed pass-through of tariffs but then fall back towards 2% later in the year.

Current inflation trends are particularly hard to assess since the government shutdown forced the cancelation of the October CPI survey and late data collection for the November numbers. Overall, we believe CPI inflation rose to 3.0% year-over-year in December from a reported 2.7% in November. Inflation could then rise further in early 2026 as strong income tax refunds allow retailers to pass on tariff costs. Still, slow wage growth, low gasoline prices and weak housing demand should keep a lid on inflation with year-over-year CPI gains only rising to 3.5% by June before falling back to close to 2.0% by the end of the year.

Summing it up, our forecast for 2026 is 2-0-2-4 - the same as the forecast we outlined two years ago. 2% economic growth, no recessions, inflation falling to 2% by the end of the year and the unemployment rate falling back to 4.0%.

Profit growth should remain solid in 2026 as companies benefit from strong productivity gains, subdued wage increases and recent tax cuts.

Despite less than 5% growth in nominal GDP last year, the pro-forma earnings of S&P500 companies rose by over 10% for a second consecutive year, led by technology stocks but also including strong gains from financials and health care companies. This strong earnings growth was boosted by tax provisions in the OBBBA. However, it also reflected in impact of a falling dollar in boosting the dollar value of foreign revenues as well as relatively restrained wage growth and solid productivity gains.

We expect all of these trends to persist in 2026 which should lead to another years of close to double-digit earnings gains. However, earnings growth is, as ever, very cyclically sensitive, so a fall into recession would undoubtedly lead to a much less positive outcome. Investors should also be aware of the somewhat circular nature of earnings growth within the tech sector so that if something goes wrong with the AI theme, corporate earnings could take a more serious hit.

The Fed could cut twice in 2026 and possibly three times if growth and inflation both fade.

The Federal Reserve cut the federal funds rate by 0.75% in late 2025 following a 1.00% total reduction in late 2024. This has brought the rate down to a range of 3.50 - 3.75%. Markets are pricing in a better than 50% shot of another rate cut in the first quarter and a 100% shot of at least one rate cut in the first half of 2026.

We believe this is likely – assuming that the economy does not see a further burst of fiscal stimulus – and the Fed may cut again by September, bringing the funds rate down to a range of 3.00 - 3.25% essentially at the Fed’s 3.00% estimate of the long run neutral rate. However, if the economy weakens again in late 2026, particularly if the result of mid-term elections appears to preclude the possibility of further fiscal stimulus, the Fed may move to an accommodative stance in late 2026. Since this will not actually stimulate the economy, by 2027 the Fed could find itself cutting short-term rates further on the slippery slope towards the zero lower bound once again.

The dollar could fall further reflecting slower U.S. growth and continued Fed easing.

The dollar fell sharply in 2025. This may, in part, reflect its high valuation going into the year and America’s chronic trade deficits. However, it could also be the result of questions among both U.S. and international investors about their concentration in U.S. assets and the policies of the U.S. Administration.

A key driver of the dollar in the long run has been the higher interest rates offered on U.S. debt compared to other DM economies. As the Federal Reserve cuts more aggressively than other central banks in 2026 we believe this narrowing in interest rate spreads, combined with a still high trade deficit, should lead to a further dollar decline.

Bond yields look close to fair value arguing for a neutral allocation.

A resumption of Fed easing and signs of a weaker labor market have allowed long-term interest rates to drift down in recent months, even as inflation has gradually increased. From here, however, we expect long-term rates to remain range-bound as the effects of monetary ease are counteracted by increased Treasury issuance, a temporary surge in economic growth and delayed tariff-related inflation.

For investors, there is not a strong argument for making a bet either on duration or credit in bonds. Even if the economy weakens further, any rally in bonds should be limited by rising federal borrowing and stubborn inflation. Moreover, at least in the short run, we expect the economy to avoid recession, partially justifying today’s tight credit spreads.

However, we do think that roughly normal bond allocations make sense in this environment – historically, today’s close-to-4.3% yield on the Bloomberg bond index has been associated with close to 4.3% annual returns over a 5-year period. Provided inflation fades later in 2026, these yields and potential returns seem reasonable.

Mega-cap U.S. equities still look expensive relative to the rest of the market.

One glaring anomaly, entering 2025, was the huge outperformance of the largest companies in the S&P500, both in terms of earnings and equity market gains. Much of this reflects the dominant market position of U.S. tech firms and a surge of interest in and investment spending on artificial intelligence. That being said, in recent years, the stock market outperformance of these companies has generally outpaced their outperformance in earnings, leaving their valuations at high levels relative to the rest of the market.

This anomaly persists today with the top 10 companies in the S&P500 representing roughly 40% of the market value of the entire index. For long-term investors, it may make sense to increase allocations to other areas of financial markets in case, economic, geopolitical or idiosyncratic forces turns a mega-capU.S. equity boom into a bust.

International equities still look cheap relative to the U.S. market.

In 2025, international stocks sharply outperformed their U.S. counterparts, as local-currency gains were amplified by the impact of a falling dollar. Given this dramatic outperformance, many investors may be wondering if they have missed the boat in increasing international allocations. We don’t believe so - for three reasons:

• First, even after a 2025 rally, non-U.S. stocks still carry much lower valuations than their U.S. counterparts.

• Second, the dollar remains very over-valued given our trade fundamentals and we expect it to fall in the years to come, and,

• Third, given the outperformance of U.S. stocks over the last decade, most U.S. investors are likely very underweight international stocks relative to an appropriate long-term asset allocation.

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Alternative investments can add total return, income and diversifications to portfolios.

The last few years have seen very strong stock market gains. However, that very outperformance could limit future returns. Moreover, the traditional role that bonds play in zagging when stocks zig has been challenged in recent years by higher inflation which negatively impacts both stocks and bonds.

In this environment, many investors are exploring alternative assets, such as private equity, private credit, infrastructure and real estate. These assets are all quite different – some provide strong long-run returns, some generate strong current income and some act as good diversifiers to publicly-traded stocks and bonds. Many of them are quite illiquid and so should be thought of only as long-term investments. Moreover, the performance of different assets within the alternatives space has varied considerably depending on the manager. Still, adding alternatives to a traditional stock-bond portfolio may make sense for many investors and we expect this area of financial markets to continue to grow in the years ahead.

It should be noted, finally that, while alternatives can play a defensive role in portfolios, they can also be used for offense, allowing investors, for example to participate in the AI theme through smaller private firms building new AI applications or generating the electricity necessary to develop them. However, more broadly, alternatives and international equities can both play and important role in rebalancing portfolios. This is important since, after three great years for U.S. equity markets, investor portfolios are not just significantly larger but also are more risky and more concentrated than most investors intended. Consequently, the most important financial resolution of the new year should be to rebalance – particularly if this can be done in a tax-efficient manner.

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Your Portfolio

I try my absolute best to ensure my human outlook does not spill into your investment strategy.

“The stock market is a device for transferring money from the impatient to the patient.”

— Warren Buffett,

As a strategic asset allocator (decisions made based on past outcomes) versus a tactical asset allocator (decisions made based on future outlook), my belief is that future short-term outcomes are not yet known, and that past outcomes are a matter of fact.

Based on this framework, we make systematic determinations for portfolio shifts every quarter. The end result of these determinations was to reduce your overall equity/stock holdings in January 2020, increase in April 2020, decrease in July 2021, increase in July 2022, reduce in July of 2023, and then again in April 2024, and then a further reduction of overall equity exposure in December 2024.

We did not make a portflio shift this quarter (December 2025).

A graphical representation of what I describe above, contrasted against the S&P 500 index (just one of several market factors) over the past 5 years, can be found below, whereby green dots represent slight shifts into equity, and red dots represent slight shifts out of equity.

From a historical perspective, you may find that this strategy has yielded results that had your portfolio overperform in 2020, underperform in 2021 (shifting out as stocks went up), overperform in 2022 (despite the down year) and in 2023, meet, or slightly miss, expectations in 2024, and neutral in 2025.

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We continue to monitor any potential new holdings on an almost daily basis, and continue to evaluate your existing holdings to determine if the reasons we bought them in the first place remain true today.

I hope you find this both interesting and informative in keeping pace with the events of today’s financial world.

This publication contains the opinions of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Designed Securities Ltd. or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any securities. The information in this publication is intended for informational purposes only and is not intended to constitute investment, financial, legal, tax or accounting advice. Many factors unknown to us may affect the applicability of any statement or comment made in this publication to your particular circumstances. Hence, you should not rely on the information in this publication for investment, financial, legal, tax or accounting advice. You should consult your financial advisor or other professionals before acting on any information in this communication.

Avesta Wealth is an investments trade name of Designed Securities Ltd (DSL). DSL is regulated by the Canadian Investment Regulatory Organization (www.ciro.ca) and Member of the Canadian Investor Protection Fund (www.cipf.ca ). Investment products are provided by Designed Securities Ltd. and include, but are not limited to, mutual funds, stocks, and bonds. Adam Schacter is registered to provide investment advice and solutions to clients residing in the provinces of British Columbia, Alberta, Manitoba, Ontario, Quebec, and Nova Scotia.